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Gary D. Schnitkey, agricultural economist and risk management expert

8/8/2012 8:00 am

Gary D. Schnitkey, an agricultural economist at the University of Illinois, is an expert on risk management who studies issues affecting the profitability of farms. He spoke with News Bureau business and law editor Phil Ciciora about the effect of the drought on crop insurance payments.

Are crop insurance companies prepared for what will likely be a year of massive payouts?

Yes, crop insurance companies have sufficient funds to cover losses. Crop insurance companies are federally regulated and have to be able to withstand vary large losses for two years in a row. Private crop insurance also reinsures losses with private reinsurers, thereby increasing their ability to bear losses.

Crop insurance programs were designed to help farmers in a year like this. Farmers pay premiums and then receive coverage. Crop insurance programs that most farmers buy will keep farmers from having large financial losses. Other years, such as when prices decline for multiple years, are not covered as well by crop insurance.

What can those farmers who didn’t buy crop insurance do at this point, if anything?

In Illinois, roughly 60 percent of farmers have purchased policies that will provide protection that will generally keep the farm financially secure. Twenty percent purchased polices that will provide moderate to low protection, and 20 percent do not carry crop insurance. There is little those farmers who did not purchase crop insurance can do at this point. Hopefully, they have financial reserves that can be used to get through this year.

Ultimately, how will farmers fare this year — better or worse than the drought of 1988?

The 2012 crop insurance programs are much better than those that were available in 1988. In 2012, farmers have the ability to purchase revenue policies. In 1988, only yield insurance was available. The highest coverage level available in 1988 was 65 percent. Today coverage levels up to 85 percent are available. Those farmers purchasing crop insurance will be better off than their counterparts in 1988.

Will crop insurance premiums be sky-high next year?

No, it will take until 2014 before experience from 2012 enters into premium setting. Even in 2014, the impact of the 2012 drought may be relatively minor. Years like 2012 are anticipated when developing crop insurance premiums.

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